Introduction

The evolving global tax landscape significantly impacts cross-border mergers and acquisitions (M&A), particularly for Indian companies expanding internationally or foreign entities acquiring Indian businesses. Tax reforms spearheaded by the OECD, G20, and national governments aim to curb tax avoidance, ensure fair taxation to the source and resident country, and increase transparency. Indian businesses engaged in cross-border M&A must navigate these tax reforms to optimize deal structures, ensure compliance, and mitigate risks.

This article examines key global tax reforms affecting cross-border M&A from an Indian tax perspective and explores strategies to manage their impact.

Key Global Tax Reforms Impacting Cross-Border M&A

Comparative Analysis of Global Tax Reforms and Their Impact

The following table highlights key global tax reforms, their implications, and their specific impact on Indian cross-border M&A transactions:

OECD BEPS Initiatives and Pillar Two Minimum Tax

• The Base Erosion and Profit Shifting (BEPS) initiative, led by the OECD, has introduced several measures affecting cross-border M&A transactions. BEPS Action Plans emphasize economic substance, prevent treaty abuse, and promote tax transparency.
• The Global Anti-Base Erosion (GloBE) rules under Pillar Two introduce a 15% global minimum tax on multinational corporations (MNCs) with revenues exceeding EUR 750 million.
• Impact on Indian M&A:
  • Availability and maintaining of accounting and books of account in order to compute consolidated income and Global income taxable income and tax liability thereon.
  • Excess cost due to additional compliance burden.
  • Potential risk and exposure when one country implement Pillar Two, but other country does not implement.
  • Indian companies acquiring foreign entities must assess the target’s compliance with BEPS regulations.
  • Increased tax liabilities for Indian multinationals operating in jurisdictions with lower tax rates.
  • Need for robust transfer pricing documentation and economic substance tests to prevent tax disputes.
  • Potential restructuring of holding structures to align with the minimum tax requirements and avoid additional tax outflows.
  • Impact on digital companies operating in multiple jurisdictions requiring adjustments in revenue recognition and profit allocation.

Changes in Treaty Shopping and Anti-Avoidance Rules

• Many nations have tightened their anti-treaty shopping provisions, impacting the use of low-tax jurisdictions like Mauritius, Luxembourg, Singapore, and the Netherlands.
• The Multilateral Instrument (MLI) introduced Principal Purpose Test (PPT) and Limitation on Benefits (LOB) clauses, restricting the ability to claim treaty benefits.
• Impact on Indian M&A:
  • Transactions structured via tax-friendly jurisdictions are now under stricter scrutiny.
  • Need for substance-based structuring rather than artificial treaty-based tax planning.
  • Foreign investors acquiring Indian companies may face higher withholding tax rates due to reduced treaty benefits.
  • Restructuring of investments in low-tax jurisdictions to align with MLI provisions and avoid denial of treaty benefits.
  • Requirement for operational presence and economic activity to support the legitimacy of tax residency claims.

Transfer Pricing and Documentation Requirements

• Stricter transfer pricing regulations under BEPS Action 13 mandate comprehensive documentation, including Master File and Country-by-Country Reporting (CbCR).
• India has aligned with these rules, increasing compliance obligations for companies involved in cross-border transactions.
• Impact on Indian M&A:
  • Enhanced documentation requirements for intercompany transactions, increasing due diligence burdens.
  • Need to justify pricing of intangible assets, royalties, and services to avoid litigation.
  • M&A transactions involving digital businesses with valuable IP must adhere to fair market valuation and arm’s length pricing.
  • Expansion of transfer pricing audits and increased scrutiny on intergroup financial arrangements.
  • Risk of tax adjustments and penalties for improper allocation of profits among group entities.

Pillar One: Digital Taxation and Impact on M&A

• Pillar One reallocates taxing rights to market jurisdictions, affecting technology and digital business acquisitions.
• India has introduced an Equalization Levy (EL) of 6% levy on certain online advertising services.
• Impact on Indian M&A:
  • Increased tax liability for digital businesses operating in multiple jurisdictions.
  • Need to assess exposure to digital taxation when acquiring global technology firms.
  • Potential disputes in tax treaty negotiations affecting profit attribution.
  • Adjustment of M&A valuation models to incorporate the impact of digital taxes.
  • Increased compliance burden due to multiple tax jurisdictions imposing unilateral digital tax measures.

General Anti-Avoidance Rules (GAAR) and Substance Over Form Approach

• India’s GAAR provisions empower tax authorities to recharacterize transactions lacking commercial substance and bonafide business activity.
• M&A transactions structured primarily for tax benefits may be subject to re-evaluation.
• Impact on Indian M&A:
  • Transactions must demonstrate commercial substance beyond tax optimization.
  • Need for robust legal and economic and commercial rationale in deal structuring.
  • Increased risk of litigation for aggressive tax planning strategies.
  • Higher scrutiny on round-tripping transactions and artificial arrangements.
  • Shift towards transparent and substance-backed investment structures.

Tax Strategies for Cross-Border M&A Post-Reforms

Tax-Efficient Holding Structures

• Indian acquirers should evaluate tax-efficient jurisdictions for holding companies while ensuring compliance with MLI and GAAR provisions.
• Popular jurisdictions such as Singapore, Netherlands, and UAE must now be chosen based on economic substance rather than pure tax benefits.
• Establishing operational headquarters in strategic jurisdictions to support tax residency claims.

Optimizing Withholding Tax and Treaty Benefits

• Review revised tax treaties to determine optimal routes for dividend, royalty, and interest payments.
• Structuring payments through jurisdictions with robust tax treaties can help reduce tax leakage.
• Implement hybrid structures where permissible under BEPS-compliant frameworks.
• Consider advance pricing agreements (APAs) to gain tax certainty on cross-border transactions.

Managing Transfer Pricing Risks

• Conduct thorough benchmarking for intercompany transactions.
• Ensure compliance with arm’s length pricing principles to withstand tax authority scrutiny.
• Strengthen transfer pricing documentation, including local and global reports.
• Leverage technology-driven solutions to automate and streamline transfer pricing compliance.

Pillar Two Minimum Tax Planning

• Assess global tax exposure for Indian MNCs expanding abroad.
• Consider restructuring operations in higher-tax jurisdictions to mitigate top-up tax liabilities.
• Realignment of transfer pricing policies across all group entities of the MNC.
• Explore potential tax credits or deductions available to offset minimum tax exposure.

Due Diligence and Risk Mitigation

• Conduct pre-acquisition tax due diligence to assess potential tax exposures.
• Identify historic tax non-compliance, pending litigation, and undisclosed tax risks in target companies.
• Negotiate appropriate indemnities and warranties in transaction agreements.
• Implement robust post-acquisition tax integration plans to align the acquired entity with global tax norms.

Conclusion

The impact of global tax reforms on cross-border M&A is profound, requiring Indian businesses to adopt a proactive approach in deal structuring and compliance. As tax authorities worldwide tighten regulations, companies engaging in international M&A must ensure transparency, economic substance, and adherence to BEPS guidelines. Implementing tax-efficient structures, optimizing withholding tax benefits, and managing transfer pricing risks can help Indian businesses navigate the complexities of global tax reforms while maximizing value in cross-border M&A transactions. Given the increasing regulatory scrutiny, involving tax advisors and legal experts early in the M&A process is crucial to ensuring a successful and compliant transaction.